AIR Worldwide: Significant Quality Issues with Insurers’ Exposure Data

A recent analysis of insurers’ exposure data by AIR Worldwide Corporation (AIR) determined that the quality and completeness of most insurers’ commercial policy data is insufficient for a detailed and accurate assessment of their catastrophe risk.

“Nine out of 10 commercial properties analyzed had replacement values significantly less than the amount estimated by our construction specialists,” said Karen Clark, president and CEO of AIR. “The variability in the quality of data among companies was also significant with insurers’ average replacement values ranging from 20 to 80 percent of values derived using a standard engineering-based cost estimation process.”

AIR’s analysis examined four data elements critical for accurate catastrophe loss estimates: replacement value, construction, occupancy, and location. The analysis reviewed exposure data from companies representing more than 50 percent of the total U.S. property market.

An accurate replacement value, which is the full cost to replace the building in the event of a total loss, is essential for an accurate catastrophe loss estimate.

AIR’s analysis exposed large discrepancies between insurers’ replacement values and replacement values derived using a standard engineering-based cost estimation process. Replacement values were equal to coverage limits for many commercial policies, suggesting that some companies are using the coverage limit as a proxy for the replacement value. This will tend to underestimate catastrophe risk, particularly for policies covering only a share of the property.

Construction and occupancy information are also important for accurate catastrophe loss estimates. For example, light metal structures are more than three times as vulnerable to hurricane force winds as those built using reinforced concrete. AIR found a large variation among companies in the degree of completeness of their construction and occupancy information, with the majority of companies lacking construction and/or occupancy information for more than a third of their policies.

To take full advantage of a catastrophe model’s site-specific characteristics–such as distance to coast or nearest fault, elevation or soil data, and land use/land cover information–catastrophe risk analyses must be run using street address level data, which can be translated into a specific latitude and longitude.

AIR’s analysis found significant progress in the quality of location information for commercial policies as a high percentage of commercial policies were identified by street addresses. However, many multi-location policies contained only a single address (typically the headquarters or billing address), which is not sufficient for an accurate catastrophe loss analysis.

“Modeled loss estimates are only as accurate as the exposure data input into the catastrophe model,” continued Clark. “Insurers need to put more emphasis on improving the quality and completeness of their exposure data to improve the accuracy of the catastrophe risk information used by company management.”

For the full AIR report, visit www.air-worldwide.com.